Narrow Spreads, More Plentiful Loans Drive CLO Issuance in April

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A combination of attractive financing and more plentiful supply of collateral CLO issuance to $10.2 billion in April. the highest level in nearly two years, according to Thomson Reuters LPC.

A total of 17 collateralized loan obligations printed during the month, up from 15 deals totaling $8.3 billion in March. The larger dollar volume partly reflected a higher deal-size average of $602 million – including the first-ever $2 billion collateralized loan obligation deal in the post-crisis era, according to S&P Global Ratings.

New-volume issuance is now $27.6 billion on the year. Refinancings totaled $15.1 billion from 33 deals, and 11 resets had an aggregate volume of $5.1 billion, continuing the spike in refi activity that so far in 2017 has driven $69.7 billion in activity.  

Analysts have attributed most refis to so-called “Crescent” deals that follow federal agency guidance permitting one-time, limited refinancings for CLOs issued prior to December 2014 to maintain risk-retention exemptions.

Despite the focus on refinancing, CLO managers and arrangers were more active in new deals last month, producing the market’s second-highest monthly volume since June 2015 (which was $13.5 billion in 26 deals). The only month with higher output in that period was the $17 billion last December, which was driven mostly by managers racing to complete prior to the Dec. 24 enforcement of the risk-retention standards.

The apparent impetus now is a mix of favorable market spreads and a surge in leveraged loan volume via refinancing efforts by speculative-grade rated companies. According to Thomson Reuters, loan issuance of $427 billion has doubled last year’s pace through April.

More than 77% of the $310 billion in institutional volume (a prime supply source for CLO portfolios) is from refinancing actvity.

Among the CLO deals pricing in April was Antares Capital Advisors' first-ever CLO 2.0 transaction via Deutsche Bank, according to a pre-sale report from Moody’s Investors Service. The $2.1 billion Antares CLO 2017-1 portfolio of small/medium enterprise loans is the largest-ever CLO 2.0, and priced with a spread of 225 basis points over Libor.

And it wasn't the only 10-figure deal: GSO/Blackstone launched the $1.03 billion Catskill Park CLO through Bank of America Merrill Lynch.

Spreads on AAA notes in CLOs continued to tighten in April, with margins average 125 basis points over Libor and the tightest spreads recorded at 118 basis points, according to Thomson Reuters LPC.

Total assets under management grew to $451 billion for U.S. CLOs, with 96% of that now included in CLO 2.0 vintage deals as pre-crisis CLOs continue to pay down and roll off managers’ books.

Secondary market trading of CLOs in the month showed an increase in the percentage of loans (68%) now trading at par-plus prices; loans trading below 90 cents on the dollar have narrowed to just 5% of the market. The average bid of CLO portfolios increased to 98.31, while the median bid rose by 19 basis points to 98.65.

European CLOs has a second consecutive month of brisk activity, as well, with four deals totaling €1.5 billion in April bringing year-to-date issuance to €4.4 billion in 11 deals.  Refi/Reset activity was €2.54 billion, down from more than €3 billion in March.

Only one deal qualified for a discount margin in the month, pricing at 85 basis points above the negative Euribor rate.

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